After approximately 18 months of research, Canada’s largest non-state institutional investor, the Canada Pension Plan Investment Board (CPPIB), has placed its bets on India’s private real estate market. A $200 million commitment to the office development pipeline of Mumbai conglomerate Sharpoorji Pallonji Group in November was followed last month with a bigger, $250 million commitment to a residential development finance program managed by Indiareit, the private equity real estate arm of the Piramal Group.
“These are our commitments for now,” confirmed Wenzel Hoberg, CPPIB’s real estate head for Europe, whose London-based team is representing the C$192.8 billion (€129.19 billion; $175.36 billion) institutional investor in the second venture.
CPPIB joins a host of other large institutions that have firmed up long-standing relationships with Indian operating partners over the past two years, including the Abu Dhabi Investment Authority, GIC Private Limited and Dutch pension administrator APG. They follow a largely unsuccessful wave of private equity real estate funds that flooded into the country after the Indian government permitted foreign direct investment in property in 2005.
“This is an attractive entry point because the impatient capital isn’t there now,” Hoberg commented. “Today, we can build partnerships and find funding gaps that we wouldn’t have found before in a hot market. We think the fundamentals for long-term capital are positive. If you are short-term capital, however, obviously you are dependent on getting the result right very quickly. That hasn’t worked for a first wave of private equity funds, and that is why a lot of people left the country disappointed.”
CPPIB’s investment in India’s residential development finance space sees the pension plan partner with an organization already in the marketplace. Over the last two years, Indiareit has built a loan book worth $300 million, and the new venture’s strategy actually relates in part to the failures of developers to accurately marry their construction schedules with their finances, according to Khushru Jijina, managing director. Many of them were capitalized by private equity or regular bank finance, both of which are capital types that are hard to roll over.
“There are several good projects with good developers that require a churn of debt, so they are coming to me,” Jijina said. He predicted that timing dislocations of the past would be to the venture’s benefits as it is able to lend to developments at a mature stage in their evolution.
The venture’s loans are more expensive than typical bank lending, with interest rates between 18 percent and 22 percent versus approximately 13 percent. However, Jijina promoted the flexible nature of the venture’s debt versus that of its competition. Indeed, the debt can be repaid at negotiable intervals – monthly to even annually – and can be used for a variety of purposes instead of one pre-stated purpose, just two factors of difference to traditional loans.
Describing the strategy as “a sweet spot” that “straddles a halfway place between bank finance and private equity,” Jijina said: “There’s no competition here.” CPPIB evidently agrees and has voted with its capital, although the pension plan will wait for these ventures to bear fruit before Indian real estate sees more of its capital.